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S T U D Y T PAPER F2 E MANAGEMENT ACCOUNTING X T In this edition approved by ACCA x We discuss the best strategies for studying for ACCA exams x We highlight the most important elements in the syllabus and the key skills you will need x We signpost how each chapter links to the syllabus and the stu...

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S T U D Y

PAPER F2 MANAGEMENT ACCOUNTING

In this edition approved by ACCA x

We discuss the best strategies for studying for ACCA exams

x

We highlight the most important elements in the syllabus and the key skills you will need

x

We signpost how each chapter links to the syllabus and the study guide

x

We provide lots of exam focus points demonstrating what the examiner will want you to do

x

We emphasise key points in regular fast forward summaries

x

We test your knowledge of what you've studied in quick quizzes

x

We examine your understanding in our exam question bank

x

We reference all the important topics in our full index

BPP's i-Learn and i-Pass products also support this paper.

FOR EXAMS IN DECEMBER 2009 AND JUNE 2010

T E X T

First edition 2007

Third edition June 2009 ISBN 9780 7517 6362 1 (Previous ISBN 9780 7517 4721 8) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www.bpp.com/learningmedia Printed in the United Kingdom

All our rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd.

We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions. The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated.

Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests. © BPP Learning Media Ltd 2009

ii

Contents Page

Introduction How the BPP ACCA-approved Study Text can help you pass Studying F2 The exam paper and exam formulae sheet

Before you begin… are you confident with basic maths?

v vii viii 1

Part A The nature and purpose of cost and management accounting 1

Information for management

23

Part B Cost classification, behaviour and purpose 2 3

Cost classification Cost behaviour

41 55

Part C Business mathematics and computer spreadsheets 4 5

Correlation and regression; expected values Spreadsheets

71 89

Part D Cost accounting techniques 6 7 8 9 10 11 12

Material costs Labour costs Overhead and absorption costing Marginal and absorption costing Process costing Process costing, joint products and by-products Job, batch and service costing

113 137 159 183 197 225 237

Part E Budgeting and standard costing 13 14 15 16

Budgeting Standard costing Basic variance analysis Further variance analysis

261 281 289 307

Part F Short-term decision-making techniques 17 18 19

Cost-volume-profit (CVP) analysis Relevant costing and decision-making Linear programming

323 343 357

Exam question bank

379

Exam answer bank

399

Index

417

Review form and free prize draw

Contents

iii

A note about copyright Dear Customer What does the little © mean and why does it matter? Your market-leading BPP books, course materials and elearning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content. Breach of copyright is a form of theft – as well being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics. With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: x

Photocopying our materials is a breach of copyright

x

Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright

You can, of course, sell your books, in the form in which you have bought them – once you have finished with them. (Is this fair to your fellow students? We update for a reason.) But the ilearns are sold on a single user license basis: we do not supply ‘unlock’ codes to people who have bought them second hand. And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them?

iv

How the BPP ACCA-approved Study Text can help you pass – AND help you with your Practical Experience Requirement! NEW FEATURE – the PER alert! Before you can qualify as an ACCA member, you do not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement.

Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success.

Developing exam awareness Our Texts are completely focused on helping you pass your exam. Our advice on Studying F2 outlines the content of the paper, the necessary skills the examiner expects you to demonstrate and any brought forward knowledge you are expected to have. Exam focus points are included within the chapters to provide information about skills that you will need in the exam and reminders of important points within the specific subject areas.

Using the Syllabus and Study Guide You can find the syllabus, Study Guide and other useful resources for F2 on the ACCA web site: www.accaglobal.com/students/study_exams/qualifications/acca_choose/acca/fundamentals/ma

The Study Text covers all aspects of the syllabus to ensure you are as fully prepared for the exam as possible.

Testing what you can do Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt. We include Exam-style Questions – lots of them - both within chapters and in the Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content.

Introduction

v

Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list Topic list

Syllabus reference

Tells you what you will be studying in this chapter and the relevant section numbers, together with the ACCA syllabus references.

Introduction

Puts the chapter content in the context of the syllabus as a whole.

Study Guide

Links the chapter content with ACCA guidance.

Exam Guide

Highlights how examinable the chapter content is likely to be and the ways in which it could be examined.

FAST FORWARD

Summarises the content of main chapter headings, allowing you to preview and review each section easily.

Examples

Demonstrate how to apply key knowledge and techniques.

Key terms

Definitions of important concepts that can often earn you easy marks in exams.

Exam focus points

Provide information about skills you will need in the exam and reminders of important points within the specific subject area.

Formula to learn

Formulae that are not given in the exam but which have to be learnt. This is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your PER.

vi

Introduction

Question

Give you essential practice of techniques covered in the chapter.

Case Study

Provide real world examples of theories and techniques.

Chapter Roundup

A full list of the Fast Forwards included in the chapter, providing an easy source of review.

Quick Quiz

A quick test of your knowledge of the main topics in the chapter.

Exam Question Bank

Found at the back of the Study Text with more comprehensive chapter questions.

Studying F2 This paper introduces you to costing and management accounting techniques, including those techniques that are used to make and support decisions. It provides a basis for Paper F5 – Performance Management. The examiner for this paper is David Forster who was previously the examiner for Paper 1.2 under the previous syllabus. His aims are to test your knowledge of basic costing and management accounting techniques and also to test basic application of knowledge.

1 What F2 is about F2 is one of the three papers that form the Knowledge base for your ACCA studies. Whilst Paper F1 – Accountant in Business gives you a broad overview of the role and function of the accountant, Papers F2 – Management Accounting and F3 – Financial Accounting give you technical knowledge at a fundamental level of the two major areas of accounting. Paper F2 will give you a good grounding in all the basic techniques you need to know in order to progress through the ACCA qualification and will help you with Papers F5 – Performance Management and P5 – Advanced Performance Management in particular.

2 What skills are required? The paper is examined by computer-based exam or a written exam consisting of objective test questions (mainly multiple-choice questions). You are not required, at this level, to demonstrate any written skills. However you will be required to demonstrate the following. x

Core knowledge – classification and treatment of costs, accounting for overheads, budgeting and standard costing, decision-making.

x

Numerical and mathematical skills – regression analysis, linear programming.

x

Spreadsheet skills – the paper will test your understanding of what can be done with spreadsheets. This section will be particularly useful to you in the workplace.

3 How to improve your chances of passing You must bear the following points in mind. x

All questions in the paper are compulsory. This means that you cannot avoid studying any part of the syllabus. The examiner can examine any part of the syllabus and you must be prepared for him to do so.

x

The best preparation for any exam is to practise lots of questions. Work your way through the Quick Quizzes at the end of each chapter in this Study Text and then attempt the questions in the Exam Question Bank. You should also make full use of the BPP Practice and Revision Kit.

x

In the exam, read the questions carefully. Beware any question that looks like one you have seen before – it is probably different in some way that you haven’t spotted.

x

If you really cannot answer something, move on. You can always come back to it.

x

If at the end of the exam you find you have not answered all of the questions, have a guess. You are not penalised for getting a question wrong and there is a chance you may have guessed correctly. If you fail to choose an answer, you have no chance of getting any marks.

Introduction

vii

The exam paper Format of the paper Guidance The exam is a two hour paper that can be taken either as a paper-based or computer-based exam. There are 50 questions in the paper – 40 questions will be worth two marks each whilst the remaining 10 questions are worth one mark each. There are therefore 90 marks available. The two mark questions will have a choice of four possible answers (A/B/C/D) whilst the one mark questions will have a choice of two (A/B) or three possible answers (A/B/C). The one and two mark questions will be interspersed and questions will appear in random order (that is, not in Study Guide order). Questions on the same topic will not necessarily be grouped together. Questions will be a mix of calculation and non-calculation questions in a similar mix to the pilot paper. The pilot paper can be found on the ACCA web site: www.accaglobal.com/students/study_exams/qualifications/acca_choose/acca/fundamentals/ma/past_papers. The examiner has indicated that the pilot paper is an extremely useful guide to the mix of questions that you might expect to find in the ‘real’ exams. You should therefore study the pilot paper carefully to get an idea of the weighting that each syllabus area will be given in the exam.

Exam formulae sheet You will be given an exam formulae sheet in your exam. This is reproduced below, together with the chapters of the Study Text in which you can find the formulae.

Regression analysis

Economic order quantity

(Chapter 4 of Study Text)

(Chapter 6 of Study Text)

a=

2C 0D Ch

6 Y b6 x  n n

b=

n6xy  6x6y n6x 2  (6x) 2

Economic batch quantity (Chapter 6 of Study Text)

r=

viii

Introduction

n6xy  6x6y 2

2

2

2

(n6x  (6x) )(n6y  (6y) )

2C 0D D C h (1  ) R

Before you begin … Are you confident with basic maths?

1

2

1 Using this introductory chapter The Paper F2 – Management Accounting syllabus assumes that you have some knowledge of basic mathematics and statistics. The purpose of this introductory chapter is to provide the knowledge required in this area if you haven't studied it before, or to provide a means of reminding you of basic maths and statistics if you are feeling a little rusty in one or two areas! Accordingly, this introductory chapter sets out from first principles a good deal of the knowledge that you are assumed to possess in the main chapters of the Study Text. You may wish to work right through it now. You may prefer to dip into it as and when you need to. You may just like to try a few questions to sharpen up your knowledge. Don't feel obliged to learn everything in the following pages: they are intended as an extra resource to be used in whatever way best suits you.

2 Integers, fractions and decimals 2.1 Integers, fractions and decimals An integer is a whole number and can be either positive or negative. The integers are therefore as follows. .....,-5, –4, –3, –2, –1, 0, 1, 2, 3, 4, 5..... . Fractions (such as 1/2, 1/4, 19/35, 101/377, .....) and decimals (0.1, 0.25, 0.3135 .....) are both ways of showing parts of a whole. Fractions can be turned into decimals by dividing the numerator by the denominator (in other words, the top line by the bottom line). To turn decimals into fractions, all you have to do is remember that places after the decimal point stand for tenths, hundredths, thousandths and so on.

2.2 Significant digits Sometimes a decimal number has too many digits in it for practical use. This problem can be overcome by rounding the decimal number to a specific number of significant digits by discarding digits using the following rule. If the first digit to be discarded is greater than or equal to five then add one to the previous digit. Otherwise the previous digit is unchanged.

2.3 Example: Significant digits (a)

187.392 correct to five significant digits is 187.39 Discarding a 2 causes nothing to be added to the 9.

(b)

187.392 correct to four significant digits is 187.4 Discarding the 9 causes one to be added to the 3.

(c)

187.392 correct to three significant digits is 187 Discarding a 3 causes nothing to be added to the 7.

Question

Significant digits

What is 17.385 correct to four significant digits?

Answer 17.39

Basic maths

3

3 Mathematical notation 3.1 Brackets Brackets are commonly used to indicate which parts of a mathematical expression should be grouped together, and calculated before other parts. In other words, brackets can indicate a priority, or an order in which calculations should be made. The rule is as follows. (a)

Do things in brackets before doing things outside them.

(b)

Subject to rule (a), do things in this order. (i) (ii) (iii)

Powers and roots Multiplications and divisions, working from left to right Additions and subtractions, working from left to right

Thus brackets are used for the sake of clarity. Here are some examples. (a) (b) (c) (d)

3 + 6 u 8 = 51. This is the same as writing 3 + (6 u 8) = 51. (3 + 6) u 8 = 72. The brackets indicate that we wish to multiply the sum of 3 and 6 by 8. 12 – 4 y 2 = 10. This is the same as writing 12 – (4 y 2) = 10 or 12 – (4/2) = 10. (12 – 4) y 2 = 4. The brackets tell us to do the subtraction first.

A figure outside a bracket may be multiplied by two or more figures inside a bracket, linked by addition or subtraction signs. Here is an example. 5(6 + 8) = 5 u (6 + 8) = 5 u 6 + 5 u 8 = 70 This is the same as 5(14) = 5 u 14 = 70 The multiplication sign after the 5 can be omitted, as shown here (5(6 + 8)), but there is no harm in putting it in (5 u (6 + 8)) if you want to. Similarly: 5(8 – 6) = 5(2) = 10; or 5 u 8 – 5 u 6 = 10 When two sets of figures linked by addition or subtraction signs within brackets are multiplied together, each figure in one bracket is multiplied in turn by every figure in the second bracket. Thus: (8 + 4)(7 + 2) = (12)(9) = 108 or 8u7+8u2+4u7+4u2= 56 + 16 + 28 + 8 = 108

3.2 Negative numbers When a negative number (–p) is added to another number (q), the net effect is to subtract p from q. (a) (b)

10 + (–6) = 10 – 6 = 4 –10 + (–6) = –10 – 6 = –16

When a negative number (-p) is subtracted from another number (q), the net effect is to add p to q. (a) (b)

12 – (–8) = 12 + 8 = 20 –12 – (–8) = –12 + 8 = –4

When a negative number is multiplied or divided by another negative number, the result is a positive number. –8 u (–4) = +32 –18/(–3) = +6 If there is only one negative number in a multiplication or division, the result is negative.

4

Basic maths

–8 u 4 3 u (–2) 12/(–4) –20/5

= –32 = –6 = –3 = –4

Question

Negative numbers

Work out the following. (a)

(72 – 8) – (–3 +1)

(b)

88  8 (29  11)  12 2

(c)

8(2 – 5) – (4 – (–8))

(d)

84 81 36   9  3 3  10 3

Answer (a)

64 – (–2) = 64 + 2 = 66

(b)

8 + (–9) = –1

(c)

–24 – (12) = –36

(d)

–6 – ...